In an article on tax deductions for real estate investors, I wrote:
“If you spend the majority of your time in the real estate business as a real estate professional, your rental losses are not passive. This means that your losses are fully deductible against all income, passive and non-passive.
"Otherwise, your losses are passive and only deductible up to $25,000 against your rentals' income (deduction phases out if your modified adjusted gross income (MAGI) is between $100,000 and $150,000). However, losses of more than $25,000 can be carried over to the following year.”
A reader asked the following question:
"My wife and I are passive investors. My question: When you speak of losses being phased out at certain income levels, are losses in this context a synonym for deductible expenses, or does the term "losses" mean the amount by which rental property expenses exceed rental income? Many thanks, Peter”
And my answer:
This refers to gross income from the rental minus deductible expenses. Most expenses relating to owning a rental property are deductible. The big exception is repairs vs. improvements, which I discussed in the article.”
Click here if you would like to read the complete article.